How to Consolidate a Federal Student Loan?
Taking out a federal student loan can be deceptively easy; simply sign this form, and your immediate money problems for school will be taken care of. For some people, this becomes such an easy fix that they take on loan after loan, solving all their current problems and worrying about the future when they get to it.
And then they get to it, and it seems like the only pieces of mail they receive are bills and notices of payment on all the student loan payments they now have to make. Each loan has its own principal, its own payment amount, and its own interest. Trying to stay on top of all those loans, plus other financial obligations, can feel impossible. When you feel that you can’t stay on top of all your student loans anymore, you have a few last-resort options to save yourself from collections agencies. One such option is bankruptcy. Another is to consolidate your debts, but how do you go about doing that?
What Is Loan Consolidation?
As the name suggests, loan consolidation means that you consolidate all your disparate loans into one single loan, with its own timeframe, payment schedule, and interest rate.
Alternatively, another form of debt consolidation involves keeping your debts disconnected, but consolidating the payments. Every month, you would send a single payment to a debt consolidation agency, which would then be responsible for disbursing that payment to the appropriate creditors.
Is Loan Consolidation a Good Idea?
Debt consolidation can help ease the burden of mounting loan repayments and interest rates that seem to be going up and up, but it’s not a “get out of jail free” card. It involves turning over your entire financial history to a debt consolidation agency (or the Department of Education, if you are consolidating only your federal loans). Consolidating your debt means that you will be able to pay lower interest rates on the loan, at the cost of adding years to your loan’s life span. Some of the federal consolidation options offered by the government can last for up to 25 years.
One advantage to consolidating your federal student loan is that even if the lifetime of the loan is extended far into the future, the interest on the consolidated loan becomes fixed. The Harvard University Gazette reports that students who consolidate after they have graduated (consolidation is not open to applicants who are still matriculated) can save on student loan repayments while enjoying a fixed rate on the consolidated loan.
There are restrictions and drawbacks to consolidating your student loans. Some of them, like the Federal Perkins Loan, will not be forgiven if you add it to your consolidation pile. Up to 100 percent of your Perkins loan would be forgiven if you were to meet certain forgiveness criteria, such as:
- Entering a law enforcement field
- Entering the nursing profession
- Joining the U.S. Army
- Joining the Peace Corps
- Become totally disabled
- Declaring bankruptcy
If, however, you consolidated your Perkins Loan, you would not be eligible to have it forgiven, even if you met one or more of the above conditions. Furthermore, the Department of Education warns that borrower benefits for certain loans may be withdrawn if the loans are consolidated, especially with other federal loans. For example, while Perkins, Stafford, and Grad PLUS loans can be consolidated with the Parent PLUS loan, doing so eliminates some of the repayment options offered by simply combining just the Perkins, Stafford, and Grad PLUS loans.
Consolidating Private and Federal Loans
Private lenders (such as banks or credit unions) back private loans, and they can set their own rates and terms of refinancing, payment, and interest. Federal loans, on the other hand, are backed by the federal government, and they have fixed and vetted rates and terms. Private lenders will accept consolidations with federal loans because you will be paying them to consolidate all your loans together. However, while this is possible (and legal), it is not a good idea. Speaking to US News & World Report, the director of Student Loan Borrower Assistance at the National Consumer Law Center warns that mixing and matching different loans from different providers – each with their own interest rates, payment amounts, principals, and term rates – could make you pay a greater amount on your monthly interest, and for a longer period of time.
In the same US News & World Report article, the director of Compliance for American Student Assistance puts it more simply: “Don’t ever consolidate private loans with federal loans. Never.”
Loan Consolidation and Your Credit Score
It is also important to take your credit score into account when thinking about consolidating your student loan. Refinancing your loans into one consolidated loan creates a brand new loan, which always results in your credit score taking a hit (albeit a short-term one).
However, reducing the number of loans you have will improve your standing in the eyes of credit agencies. While the amount of your debt will not change, you will have fewer lines of credit, thus placing less strain on your credit score. That said, unwise spending habits can still pose a threat to your credit.
Also, successful repayment of a consolidated student loan will reflect positively on your credit score. This is certainly preferable to struggling to pay multiple loans, and your credit score being driven down as a result.
How Would I Consolidate My Federal Student Loans?
If you have federal loans that you want to consolidate, the Department of Education offers a website through its Federal Student Aid office. You can only apply for federal loan consolidation after you have graduated, left school, or have dropped below part-time student status, and you are in the grace period before your federal loan repayments are due to begin. Different federal loans have different grace periods. For example:
If your application for federal student loan consolidation is approved, you have 60 days to make your first payment, but you are free to start paying before that threshold, which would be advantageous. The repayment term could last anywhere from 10 to 30 years.
Should You Consolidate Your Federal Student Loans?
Consolidating your student debt is useful if your long-term future is defined by all the money you owe, and you can envision no realistic or feasible method to make all your payments for the duration of the respective loans. If, on the other hand, you are only a few years (or a few thousand dollars) away from paying off what you owe, loan consolidation may be too drastic a choice.
Consolidating your federal student loan may seem like a good idea. A College Board report covering college trends from 2013 to 2014 entitled Trends in College Pricing shows that colleges and universities have increased their tuition rates by 2.9 percent at public schools and 3.8 percent at private institutions. Meanwhile, 7 in 10 students of the class of 2012 graduated with an average debt of $29,400, per a Project on Student Debt for the Institute for College Access & Success.
With these unsettling facts and figures, the idea of throwing all your student debt together is tempting. One monthly payment, with one interest rate, going toward one principal is certainly easier than keeping track of two, three, four, or even more monthly payments, each completely different from the other. And, when used properly, student loan consolidation can help you more easily manage your debt and give you a sense of control over your finances.
However, debt consolidation signals a significant change in your financial life and must be approached with care. Our website has resources and information for you to read and learn about the ins and outs of consolidating a federal student loan. Keep browsing to learn more.
Frequently Asked Questions
The only way you can re-consolidate a federal consolidation loan is by adding a new (or otherwise not already consolidated) federal loan. Therefore, if you have already consolidated your loans once and now have a new loan that was not part of the original consolidation, you can re-consolidate the loans.Keep in mind that the rate on your re-consolidated loan will be different than that of your original consolidation loan.
It may make sense to consolidate your loans into two separate consolidation loans. This situation arises occasionally when the method of calculating the interest rate on your consolidation loan gives more weight to loans that have rates higher than the capped consolidation rate or rounds up the interest. Here are a few examples:
- If you are consolidating PLUS loans, consolidate any PLUS loans taken out since July 1, 2006 separately from PLUS loans taken out prior to July 1, 2006.
- If you are consolidating loans with an interest rate that falls on an even 1/8th of a percentage rate (for example, 7.125%) – but is not greater than 8.25% – consolidate those loans separately.
- Consolidate any loans with an interest rate greater than 8.25% separately from other loans. This way, their higher rate won’t bring up the interest rates of the other loans.
Remember to keep these consolidation loans separate when working with your lender.
When should I consolidate my student loans?
If you only have newer federal loans (issued on or after July 1, 2006), then it doesn’t matter when you consolidate. These loans have fixed rates, so you won’t benefit by consolidating at a particular time when rates might be lower. If you have older federal student loans (issued before July 1, 2006), then timing can be important.
There are two general time periods to consider for federal loans issued before July 1, 2006:
- You have left school, but haven’t started repayment
- You are in repayment
Note: After July 1, 2011, borrowers can no longer consolidate while still in school.
For either older or newer federal student loans, if you’re still enrolled in the program for which you borrowed, you can’t consolidate. If you have graduated or left school, but have not started repayment, your federal student loans are in a grace period. Your grace period interest rate is lower than the one you will carry once you enter repayment. If you consolidate during your grace period, you could lock in that lower rate.
If you are in repayment, you may consolidate at any time. However, there are still some timing factors to consider. On July 1st of each year, interest rates for older federal student loans are reset. Keep an eye out for information about what the new rate will be.
Am I eligible to consolidate my federal student loans?
Requirements vary by each lender, so check with them for more specific information. Here are some general eligibility requirements:
- You have at least one outstanding qualifying federal loan.
- You have total outstanding federal education loan balances of $7,500 or greater. (This amount can vary from one lender to the next, and some lenders will consolidate lesser amounts.)
- None of your existing student loans are in default. If you are in default on a loan, you first need to make repayment arrangements with your lenders before they will consider consolidating them.
- You are a U.S. citizen.
- You are no longer enrolled in the program at least half-time. In other words – you must have graduated or left the program for which you borrowed.
What types of loans can I consolidate?
For a federal consolidation loan, you can include just about every loan issued under the federal programs, including:
- Subsidized Federal Stafford Loans (SS)
- Unsubsidized Federal Stafford Loans (US)
- Federal Parent Loans for Undergraduate Students (PLUS)
- Federal Graduate PLUS Loans
- Federal Supplemental Loans for Students (SLS)
- Federal Perkins Loans (PERK)
- Nursing Student Loans (NSL)
- Health Education Assistance Loans (HEAL)
- Auxiliary Loans to Assist Students (ALAS)
- Health Professions Student Loans (HPSL)
- Federal Insured Student Loans (FISL)
- Guaranteed Student Loans (GSL)
- Federal Unsubsidized Consolidation Loans (UCON)
- Federal Subsidized Consolidation Loans (SCON)
- Federal Direct Subsidized Student Loans (DSS)
- Federal Direct Unsubsidized Student Loans (DUS)
- Federal Direct Consolidation Loans (DCON)
- Federal Direct Parent Loans for Undergraduate Students (DPLUS)
- Federal Direct Graduate PLUS Loans
Types of Student Loan Consolidation